AP Macro Unit 4: MCQ Practice

Which of the following is true for both stocks and bonds?

• They are interest-bearing assets.

• They are financial assets.

• They are risk-free assets.

• They are equity.

• They are ownership in a company.

Answer explanation

Both stocks and bonds are classified as financial assets, representing investments in companies or debt instruments. They are not necessarily interest-bearing, risk-free, or ownership in a company, making 'financial assets' the correct choice.

Which of the following rankings lists these assets from the least liquid to the most liquid?

• Cash, bonds, house, savings account

• Bonds, house, savings account, cash

• Savings account, cash, bonds, house

• House, bonds, savings account, cash

• Cash, savings account, bonds, house

Answer explanation

Assets are ranked by liquidity, which is the ease of converting them to cash. A house is the least liquid, followed by bonds, then savings accounts, and cash is the most liquid. Thus, the correct order is: House, bonds, savings account, cash.

Nathan has been unable to trust banks since the failure of his savings and loan bank. He claims that storing his hard-earned money at home is costless. Is Nathan correct?

• Yes, because money is the most liquid form of financial assets.

• Yes, because there is no opportunity cost in holding money.

• Yes, because the opportunity cost of holding money is the real value of goods and services it can purchase.

• No, because money is the least liquid form of financial assets.

• No, because the opportunity cost of holding money is the lost interest he could have earned on other financial assets.

Answer explanation

No, because the opportunity cost of holding money is the lost interest he could have earned on other financial assets. Keeping money at home means missing out on potential earnings from investments.

Which of the following is adjusted by the actual inflation rate?

• Nominal wages

• Automatic stabilizers

• Unemployment rate

• Price of previously issued bonds

• Real interest rates

Answer explanation

Real interest rates are adjusted for inflation, reflecting the true cost of borrowing. Unlike nominal wages or the unemployment rate, real interest rates account for the actual inflation rate, making them the correct choice.

Spencer took a 9 percent one-year fixed-rate loan to buy a new car. He expected to pay a real interest rate of 5 percent. If at the end of the year Spencer only paid a 3 percent real interest rate, which of the following is true?

• The nominal interest rate was 3%.

• The nominal interest rate was 5%.

• The actual inflation rate was 2%.

• The actual inflation rate was 4%.

• The actual inflation rate was 6%.

Answer explanation

To find the actual inflation rate, use the formula: nominal interest rate = real interest rate + inflation rate. Here, 9% = 3% + inflation rate, so inflation rate = 6%. Thus, the actual inflation rate was 6%.

• -7%

• -2%

• 2%

• 3%

• 7%

Answer explanation

The expected real interest rate is calculated using the formula: Real Interest Rate = Nominal Interest Rate - Inflation Rate. Here, it's 5% - (-2%) = 5% + 2% = 7%. Thus, the correct answer is 7%.

Which of the following transactions will keep M1 unchanged?

• Sam transferred money from his certificate of deposit to his checking account.

• Mike purchased government bonds and paid with a check.

• Leila deposited coins from her piggy bank into her checking account.

• Sandy converted a small-denomination time deposit into cash.

• Patty increased her monthly cash deposits to her retirement funds.

Answer explanation

Leila's deposit of coins into her checking account does not change the total amount of M1, as it simply shifts money from one form (coins) to another (checking account).

Which of the following is included in the monetary base?

• Currency held by the public and commercial bank reserves held with the central bank

• Currency held by the public, demand deposits at depository institutions, and commercial bank reserves held with the central bank

• Currency held by the public, demand deposits, savings deposits, and certificates of deposit

• Currency held by the public and small and large time deposits

• Currency held by the public, small and large time deposits, and commercial bank reserves held with the central bank

Answer explanation

The monetary base includes currency held by the public and commercial bank reserves held with the central bank. This is why the correct answer is 'Currency held by the public and commercial bank reserves held with the central bank'.

Mia transferred $1,000 from her checking account to a certificate of deposit. How will the M1 and M2 measures of the money supply change?

• M1 will increase and M2 will decrease.

• M1 will increase and M2 will increase.

• M1 will decrease and M2 will increase.

• M1 will decrease and M2 will not change.

• M1 will not change and M2 will increase.

Answer explanation

M1 includes liquid assets like checking accounts, which decrease when Mia transfers $1,000 to a certificate of deposit (part of M2). M2 remains unchanged as it includes both M1 and less liquid assets.

Northern City Bank keeps no excess reserves. Assume Northern City Bank receives a cash deposit of $50 dollars. As a result of the deposit, Northern City Bank’s required reserves increase by $10. What is the maximum possible change in the money supply in the banking system that could result from the $50 deposit?

• The money supply will increase by a maximum of $10.

• The money supply will increase by a maximum of $40.

• The money supply will increase by a maximum of $50.

• The money supply will increase by a maximum of $200.

• The money supply will increase by a maximum of $250.

Answer explanation

The required reserve ratio is 20% ($10 of $50). The money multiplier is 1/0.2 = 5. Thus, the maximum change in the money supply is $50 x 5 = $250. However, since $10 is required, the maximum increase is $200.